Glove Stocks: Is That A Temporary Top?

Yesterday, glove stocks dropped sharply. The sell-off came after a 4-day lull in upward price movement for most of the big 4 glove stocks (except for Harta). The price drop yesterday broke the uptrend line in the current rally for most of the glove stocks, which began on 11 September. Unless the share prices can recover above the violated uptrend lines, the glove stocks could well have made a temporary top. 

Chart 1: Harta's daily chart as at Oct 21, 2020 (Source: Malaysiastock.biz)

Chart 2: Kossan's daily chart as at Oct 21, 2020 (Source: Malaysiastock.biz)

Chart 3: Supermx's daily chart as at Oct 21, 2020 (Source: Malaysiastock.biz)

Chart 4: Topglov's daily chart as at Oct 21, 2020 (Source: Malaysiastock.biz)

With increasing news flow of the imminent arrival of vaccines, investors would have to weigh the return from holding onto their glove stocks against the risks that the rally may have peaked. In times like this, investors should consider taking some cash off the table. Redeploying the proceed to some deeply sold-down stocks, like AIRPORT or GENTING, may be a good diversification strategy to benefit from the arrival of the vaccines and the normalization of life as we know. Good luck! 

Supermx: Soaring like an Eagle

Result Update

For QE30/6/2020, Supermx's net profit rose more than 3-fold q-o-q or more than 24 times y-o-y to RM400 million while revenue rose 108% q-o-q or 147% y-o-y to RM929 million. In the notes to the Financial Statement, the company explained its spectacular y-o-y performance in these words:

Supermax achieved its best ever quarterly financial performance in its history. Revenue soared to RM929.1 million, which was 147.1% or RM553.2 million higher compared to the corresponding Quarter a year ago. Profitability rose sharply with EBITDA, PBT and PAT margins at its highest ever and industry leading levels of 60.4%, 55.9% and 43.9% respectively. The Group‟s performance was mainly due to: 

a) An exponential rise in demand for Medical Gloves & other PPEs on the back of the Covid19 pandemic. 
b) Increase in additional production capacity from the newly commissioned lines at plant # 12 block A lines. 
c) Increase in average selling prices (ASPs) each month started in March, 2020 for both its Manufacturing and Distribution divisions. 
d) Increase in percentage of the Group‟s capacity & Global Sales to end-users; including sales to governments and government agencies of various countries where Supermax Group operates and in over 165 countries.

e) Proven business model through Own Brand Manufacturing (OBM) with 2-streams of income via Manufacturing & Distribution.

Amen!

Table : Supermx's last 8 quarters' P&L

Graph: Supermx's last 55 quarters' P&L

Financial Position

Supermx's financial position as at 30/6/2020 is very healthy with current ratio at 1.3 times while gearing ratio was at 1.0 time. The company commented generously about its improved financial position as follows:

Supermax‟s already sound financial position has strengthened dramatically, most notably to a net cash position with cash & bank balances amounting to RM1.18 billion as of 30 June 2020 compared to RM173.8 million a year before. The increase is mainly due to customers paying 30%, 40% and 50% deposits in advance to secure supply.

Thanks to the deposits collected to the tune of RM892 million, Supermx was sitting on a huge cashpile of more than a billion ringgit! But bearing in mind, this is customers' money paid upfront.

Outstanding Corporate Exercise

Supermx has declared a 1-for-1 bonus which is pending shareholders' approval at its upcoming EGM on 18 August 2020 (here). Meanwhile the company has proposed a dividend-in-specie of 1 Treasury share for every 45 shares owned after the implementation of the said bonus issue (here).

Valuation

Supermx (closed at RM21.20 yesterday) is now trading at a PER of 53x (based on last 4 quarters' adjusted EPS of 40.20 sen). If we annualized the latest quarterly EPS of 30.58 sen to arrive at a full-year EPS of 122.32 sen, then its PER will be lowered to 17 times. However, I believe to compute PER based on the annualized EPS of 122.32 sen may be too generous if we looked ahead to the normalization of profit due to increased supply of gloves (as a result of increased capacity) as well as lower demand if Covid-19 pandemic were to subside. This will be a tough judgement call for analysts and investors.

Technical Outlook

Supermx share price had rallied sharply from RM2.00 in April to a high of RM23.00 just 3 days ago. Technical speaking, the share price may still go higher in the near term.

Chart: Supermx's daily chart as at Aug 10, 2020 (Source: Malaysiastock.biz)

Conclusion

Based on excellent financial performance & satisfactory financial position, fairly attractive valuation, generous bonus issue ahead and still positive technical outlook, I think Supermx deserved to be rated as a HOLD.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Supermx: Earnings Rebounded

Result Update

For QE30/9/2018, Supermx's net profit increased by 265% q-o-q or 29% y-o-y to RM36 million while revenue rose 11% q-o-q or 18% y-o-y to RM367 million. Revenue rose q-o-q due to increased sales (on account of the added capacity from the remaining lines that were commissioned at its 2 newest plants in QE31/12/2017) and a stronger USD vs RM.

Meanwhile, EBITDA and PBT rose sharply by 79% and 125%. The improvement was attributed to a combination of factors including higher sales recorded, decreased costs from improved operational efficiency and some extraordinary one-off costs recorded in the preceding quarter which were not incurred in the current quarter. As mentioned earlier, there was also an extraordinary gain of RM6.5 million recorded in the current quarter arising from an insurance claim for consequential loss. (My take: If the extraordinary gain of RM6.5 million is deducted, profit before tax would be lowered to RM46.1 million. This is comparable to PBT for QE31/3/2018 of RM45.5 million. I avoid comparing with PBT for QE30/6/2018 which was depressed by unexplained extraordinary one-off costs. When compared to same quarter last year, QE30/9/2017, adjusted PBT did increase by 13%!)


Table : Supermx's last 8 quarters' P&L

Graph: Supermx's last 48 quarters' P&L

Financial Position

Supermx's financial position as at 30/9/2018 is deemed adequate with current ratio at 1.0 time while gearing ratio was at 0.7 times.

Outstanding Corporate Exercise

Supermx has declared a 1-for-1 bonus which is pending shareholders' approval at its EGM to be held on November 30.

Valuation

Supermx (closed at RM3.24 yesterday) is now trading at a PER of 19x (based on last 4 quarters' adjusted EPS of 17.45 sen). At this PER, Supermx is deemed fairly valued.

Technical Outlook

Supermx share price had a sharp pullback since it peaked at RM4.50-4.60 in July. The decline brought the share price back to its uptrend line, SS at RM2.60. Its immediate resistance will be at RM3.35 & then RM3.50.


Chart: Supermx's weekly chart as at Nov 1, 2018 (Source: Malaysiastock.biz)

Conclusion

Based on better financial performance, fairly attractive valuation, generous bonus issue ahead and mildly positive technical outlook, I am revising my rating for Supermx from a REDUCE to a BUY ON WEAKNESS.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Supermx: Earning Plummeted

Result Update

For QE30/6/2018, Supermx's net profit dropped 71% q-o-q but rose 18% y-o-y to RM9.8 million while revenue rose 1% q-o-q or 5% y-o-y to RM329 million. The company did not give much explanation on the decline in its profit. Its revenue increase was attributed to capacity increase from its 2 newest plants, i.e. Plants #10 and #11.


Table 1: Supermx's last 8 quarters' P&L


Table 2: Sipermx's revenue, EBITDA and PBT changes as compared to last year & immediate preceding quarter

Graph: Supermx's last 47 quarters' P&L

In place of an explanation for its weaker bottom-line, Supermx gave the readers something interesting - the amount owing by the government in term of GST & Tax refund.


Table 3: Amount owing by the government to Supermx for GST & Tax refund

This is more a political statement. I can't imagine every other listed companies giving similar information on the financial statements which would cast negative light on the government. In my opinion, this information is adequately presented in its Balance Sheet as at 30/6/2018.

Table 4: Supermx's Balance Sheet as at 30/6/2018

Financial Position

Supermx's financial position as at 30/6/2018 is deemed adequate with current ratio at 1.1 times while gearing ratio was at 0.6 times.

Valuation

Supermx (closed at RM3.36 last week) is now trading at a PER of 21x (based on last 4 quarters' adjusted EPS of 16.16 sen). At this PER, Supermx is deemed fully valued.

Technical Outlook

Supermx broke above its large and rising trading range at RM3.70 in June this year. Last week, it dropped back into the trading range. This trading range will likely cap its upside for the bear term.


Chart 1: Supermx's weekly chart as at Aug 20, 2018 (Source: Malaysiastock.biz)


Chart 2: Supermx's daily chart as at Aug 20, 2018 (Source: Malaysiastock.biz)

Conclusion

Based on weaker financial performance, fully valuation and near-term technical weakness, I am revising my rating for Supermx from a BUY to a REDUCE or SELL INTO STRENGTH.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Supermx: Earnings Jumped

Result Update

For QE31/12/2017, Supermx's net profit rose 29% q-o-q or 59% y-o-y to RM36 million while revenue rose 8% q-o-q or 42% y-o-y to RM336 million. Revenue rose y-o-y due to strong demand for gloves and higher output recorded. Profits rose due to higher revenue recorded, higher production capacity and also improved operational efficiency.


Table 1: Supermx's last 8 quarters' P&L

Graph 1: Supermx's last 45 quarters' P&L

Below is a comparison of the last 4 quarters' revenue, PBT, PAT, NP & EPS of the top 4 glove manufacturers against the preceding 4 quarters' numbers. This comparison is a bit unfair for Kossan because its latest result is QE30/9/2017 whereas Harta and Supermx have the results for QE31/12/2017 & Topglov's result is for QE30/11/2017. Since I am trying to make a point about Supermx, it sufficed that we compare it with Harta & Topglov. We can see that Harta's revenue and profits have the highest increase among these 4 companies. This is followed by Supermx and then Topglov. The point to note is that Supermx is finally catching up with the other players in this sector- something we have not seen for a while.


Graph 2: Top 4 glove manufacturers' recent changes in financial performance

Valuation

Supermx (closed at RM2.20 yesterday) is now trading at a PER of 16x (based on last 4 quarters' adjusted EPS of 13.70sen). At this PER, Supermx is the cheapest glove manufacturer listed on Bursa. From the table below, we can see that the other 3 players command PER ranging from 31 to 47 times. If we were to value Supermx at the average PER of 36.7 times and discount that by 20%, Supermx's fair value would be RM4.02.


Table 2: Glove Manufacturers' valuation by PER & PBR

The market is probably assigning a lower PER for Supermx because its major shareholder, Stanley Thai was found guilty of insider’s trading. He was sentenced to a 5-year jail term & a fine of RM5 million. Stanley is appealing that decision. I believe that a 20%-discount is sufficient to factor in the risk of business interruption if the appeal is rejected and Stanley has to serve the jail sentence.

Technical Outlook

Supermx is moving within a large band between RM1.70 and RM3.30. Within this trading band, its immediate support is at RM2.00 & immediate resistance is at RM2.40.


Chart: Supermx's monthly chart as at Feb 14, 2018 (Source: ShareInvestor)

Conclusion

Based on satisfactory financial performance and attractive valuation, I am revising my rating for Supermx from a HOLD to a BUY.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Supermx: It Wasn't Meant To Be

Topglov has finally come out to deny that it would be acquiring Supermx nor Adventa after the market speculated that these 2 companies could be the target of its billion Ringgit acquisition. For more, go here. 

This denial will likely lead to a selldown in Supermx back to the price level before the run-up at around RM1.80.

If you had bought into the stock because of this "news", I believe the right course of action would be to sell off the stock & take a loss rather than to hold onto the stock as a long-term investment which wasn't meant to be one to begin with. Any loss suffered in this speculation is much regretted.



Chart: Supermx's daily chart as at Oct 24, 2017_3.30 (Source: Malaysiastock.biz)

Topglov: Planning A Huge Acquisition

Topglov was reported to be 99% sure that it has a deal in hand to acquire a glove producer that's based in Malaysia. The acquisition will cost about RM1 billion. For more, go here.

There are only 4 large glove producers in Malaysia: Topglov, Harta, Kossan & Supermx. I don't believe the major shareholders of Harta & Kossan would want to sell out. Two years ago, I would not believe Dato' Seri Stanley Thai, the chairman of Supermx would want to sell out either. However, Stanley - reportedly a former colleague of Topglov's chairman Tan Sri Lim in their early working career - is not doing too well. He has some legal problems of insider dealing and his group has some issues with the tax authority. If anyone of the big four glove producers has to sell out, it is most likely Stanley Thai.

Stanley Thai has direct & indirect shareholding of about 35% in Supermx. Supermx has a market capitalization of RM1.22 billion. That's pretty close to the figure quoted by Topglov's Lim. Assuming that Supermx is the acquiree company, what's the fair price of the company?

I have tabulated below the valuation of Supermx, Harta, Kossan & Topglov.



The average PER of Harta, Kossan & Topglov is 29.84x while Supermx's PER is only 17.70x. Assuming that Supermx deserves a PER of 80% of the average PER of Harta, Kossan & Topglov, then it shoudl command a PER of 23.88x. That means Supermx may command a fair value of RM2.47. That's 35% higher than its last done price of RM1.83.

Chartwise, Supermx has broken its long-term uptrend line, SS. The next support is will come from the horizontal line at RM1.60.


Chart: Supermx's monthly chart as at Oct 17, 2017 (Source: Shareinvestor.com)

The interesting question is Why did Lim shares this information in the public. A glove producer based in Malaysia, producing surgical gloves and valued at RM1 billion. Why? I think Topglov has the deal in the pocket and it wouldn't mind not having 100% ownership of Supermx. The higher the market price of Supermx, the lower is the chance of 100% acceptance of Topglov's MGO and the lower is its out-of-pocket expenditure.

I think Supermx could be a good trading BUY. Given the uncertainty in the market, you need to exercise careful discretion if you choose to trade in any stock.

Supermx: Earnings Recovered Somewhat

Result Update

For QE30/9/2016, Supermx's net profit rose 188% q-o-q to RM19.5 million on the back of a 1%-crease in revenue RM269 million. Compared to the corresponding quarter last year, net profit dropped 49% while revenue declined 13%.

Profit before tax dropped y-o-y due to increased minimum wages and further rationalization of natural gas subsidy. The Group has also incurred additional costs for its contact lens division particularly in terms of advertising and promotion expenses. On the other hand, raw material cost was mixed with nitrile cost down 13.3% y-o-y while natural rubber latex cost went up 5.1%.

While profit before tax dropped q-o-q, net profit rose q-o-q due to higher tax charges in the immediate preceding quarter due to additional tax paid amounting to RM7.7 million in respect of previous years’ assessments (YA2007, 2009-2011); and provision for deferred tax.


Table: Supermx's last 8 quarters' P&L

I have tabulated the pre-tax profit and net profit for first 9-month period for the past 10 years. Over the past 4 years, we can see that pre-tax profit and net profit began to diverge because effective tax rate has gone up. In fact in 2016, the effective tax rate soared to 40%. This was due to the reason given above. With the absence of prior year tax charge, net profit should recover for Supermx.

Chart 1: Supermx's las10 years' first 9 months P&L


Chart 2: Supermx's last 27 quarters' P&L

Valuation

Supermx (closed at RM2.18 yesterday) is now trading at a PER of 17.5x (based on last 4 quarters' adjusted EPS of 12.49 sen). At this PER, Supermx is deemed fairly valued.

Technical Outlook

Supermx is moving within a large band between RM1.90 & RM3.30. A breakout above RM3.30 or a breakdown below RM1.90 would point the way forward for the stock.

Chart 3: Supermx's monthly chart as at Dec 1, 2016 (Source: ShareInvestor)
 
Conclusion

Based on poor financial performance and neutral technical outlook, I revised my rating for Supermx from a BUY to a HOLD.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.